By Chantelle Arneaud, Envestors
Angel investors are referred to as smart capital because they deliver both finance and expert knowledge. But there are a few ways angels can be left feeling less than smart. We sat down with expert angels (names are changed to spare blushes) with years of experience to compile our top five lessons to avoid feeling foolish.
Check who owns the IP
One of John’s first investments was in an interactive app for tourists. ‘Not long after I parted with my cash, the company got into financial trouble and folded.’
It transpired that the CEO and not the business owned the IP. This meant that when the business folded, the CEO walked away with its greatest asset, the Intellectual Property, and started a similar company.
If the IP is not owned by the company, walk away.
Be wary of ambitious expansion plans
Tom invested £50k into a bakery business but cracks started to show. ‘The CEO was overly relaxed about the financial affairs of the company. He was keen to show growth to investors and so expanded quickly to around twenty sites.’
This rapid expansion caused issues. ‘The customer experience had suffered as a result of the business trying to do too much too quickly – which impacted the brand.’
Quick expansion and high standards not being able to remain consistent led to the critical mass never being reached. ‘It was inevitable that the company was going to go into administration once the overheads outweighed the revenues by a ridiculous amount’.
Interestingly, the company was bought by someone in the industry with more experience and it is now a thriving business with stalls across London train stations.
The lesson here is about speed and experience. Of course, as a minority shareholder, you can’t dictate the company’s plan, but you can counsel them. And if you see them trying to go too fast in an industry in which they are new, put up a red flag.
Check data sources are credible
Six months after an initial investment into a flower distribution company, Caroline discovered that the business owed £350k in VAT. ‘My due diligence on this investment, like all my investments, was done with a fine-toothed comb. The problem, I later learned, was there was missing information.’
The Business Plan that was sent to Caroline didn’t disclose this financial information. If it had, she would have quickly seen the company was insolvent.
The lesson here is a nuanced one. Of course, Caroline did her due diligence, so how could she have avoided this situation? At Envestors, we always recommend our companies work with accredited advisors to show investors information has been reviewed by a qualified third party. This could be an accountant or corporate finance advisor or, failing that, we recommend investors work with an investment network that is regulated by the Financial Conduct Authority to protect themselves from situations like this.
Julie conducted her due diligence in time to get benefit from the Enterprise Incentive Scheme (EIS), which meant her £10k investment into a fitness business would be subject to 30% tax relief and if things went badly a further £2,800 in relief, so the total amount she stood to lose was £4,200 and not the full £10k. Or so she thought.
‘Sadly, the business was absolutely not the next big disrupter.’ The business folded. ‘I was upset when I found out, but I exploded when I learned my tax relief wasn’t coming.’
Julie learned that the EIS paperwork had been incorrectly filed and there was no tax relief to be had.
Ensure all paperwork (including EIS) related to your investment is being handled by a qualified individual such as a lawyer or company secretary.
Expect the unexpected
As the pandemic has proved, external factors can’t always be controlled. Tanith learned this lesson after investing £20k into a boating business.
‘The company was doing really well and decided to expand. We were all onboard with it. To purchase more boats, the company took a loan from an international bank.’
However, when the financial crisis took hold in 2008, the bank pulled in the loans. While this decision had nothing to do with the business, it left the founders scrambling to find new backers in the worst financial crisis in recent memory. Unable to do so, the boats were sold off.
The key lesson to take away here is that stuff happens. The only way to protect yourself against the uncontrollable is to build a diverse portfolio to balance risk.
ABOUT THE AUTHOR
Chantelle Arneaud is from Envestors.Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early-stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.
- Twitter: @EnvestorsLondon